Yuan: A New Currency Standard?

The Yuan may be on course to take on the strongest currency in the global financial system, but it may still not displace it.

China is the world’s largest exporter and the second largest economy. Even as global trade has shrunk in the post-financial crisis world, China has managed to keep expanding its share of the trade pie. It has complemented these achievements with uniquely Chinese experiments in currency management and forward thinking economic policies, which have led to the rise of the Chinese Yuan (CNY) as a global currency, even challenging the dollar’s (USD) dominance. By the end of 2015, the Yuan financed a third of the cross-border trade and was the fifth most used currency for international payments and foreign exchange trading. Its status as an international currency also got cemented when the IMF in 2015, included the CNY in the much-coveted Special Drawing Right (SDR) basket of currencies as an international reserve asset. Moreover, Chinese monetary authorities, while wary of allowing the Yuan to grow too strong against the dollar, have managed to keep it at steady levels of around 6.5 CNY/USD for the past several months.

What does this mean for the dollar standard and its future? The USD still prevails in forex trading and international payments by a large margin. It also makes up more than fifty percent of the world’s currency reserves. In comparison, the CNY still accounted for 1.1 per cent of the global reserves by end of 2014. Skeptics have also pointed at the lack of full convertibility of the Yuan and the continued practice of pegging the Yuan to the dollar by the Chinese monetary authorities, to indicate that the CNY was far from eclipsing the USD as an international “safe haven”. China’s tendency to devalue its currency now and then which triggers panicked reactions in markets hasn’t helped how the currency is perceived in the international markets. Finally, the country’s slowing rates of growth and subdued export performance may also threaten the currency’s rise against the dollar.

Thus, there is considerable agreement that for the foreseeable future, the USD will still dominate as the world’s leading currency. Even assuming that China takes steps towards greater currency convertibility (as it is doing already) and the Yuan’s share in global reserves also increases, the rise of other emerging economies (e.g. India) with more open administrative setups as compared to China’s, will in all likelihood lead to a multi-polar world where the USD will still maintain its grip as the foremost currency.

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Article crisply analyses the position of Chinese currency vis-a-vis US Dollar. Although CNY is gaining in strength, for it to gain global acceptance as preferred stable and strong currency will require it to abandon it’s opaqueness as to its political system and brinkmanship in the world arena regarding its territorial rights and other natural resources.